The Implementation Regulation for Foreign Investment Law of the People's Republic of China (hereinafter referred to as the "Implementation Regulation") was promulgated by the State Council on December 26, 2019, effective as of January 1, 2020. The Implementation Regulation, as a supplementary regulation of the Foreign Investment Law of the People's Republic of China (hereinafter referred to as the "Foreign Investment Law"), aims to optimize the foreign investment environment, regulate the management of foreign investments, and continue to strengthen the protection of foreign investments. When attending the opening ceremony of the 2019 Summer Davos Forum, Chinese Premier Li Keqiang said, in his conversation with the representatives of international business, finance, think tanks and media circles, that Chinese government would like to create a stable, transparent and predictable investment environment by promulgating such complementary regulation of the Foreign Investment Law.1
1.Basic Contents and Major Changes
The Implementation Regulation consists of six chapters (namely, "General Provisions", "Investment Promotion", "Investment Protection", "Investment Management", "Legal Liability" and "Supplementary Provisions") and 49 articles in total. On the basis of the Foreign Investment Law and in comparison with the Implementation Regulation for the Foreign Investment Law of the People's Republic of China (Draft for Comments) (hereinafter referred to as the "Draft for Comments") published on November 1, 2019, the main contents and changes of the Implementation Regulation are as follows:
A.Clarifying that Chinese individuals could be the shareholders of foreign-invested enterprises
The Law on Sino-foreign Equity Joint Ventures of the People's Republic of China didn't specify whether Chinese individuals could be shareholders of foreign-invested equity joint venture enterprises, which made it difficult for Chinese individuals to participate in the establishment of any equity joint venture enterprises as shareholders directly. Article 3 of the Implementation Regulation specifies that other investors include Chinese individuals, which enables Chinese individuals to equally set up foreign-invested enterprises with foreign individuals or foreign companies as shareholders.
B.Clarifying that the Foreign Investment Law and Implementation Regulation shall apply mutatis mutandis to the investments made in Mainland China by investors from Hong Kong, Macau or Taiwan
The Foreign Investment Law does not specify whether the investors from Hong Kong, Macau or Taiwan could be treated as foreign investors. However, article 48 of the Implementation Regulations specifically clarified that "the Foreign Investment Law and the Implementation Regulation shall apply mutatis mutandis to the investments made in Mainland China by investors from Hong Kong Special Administrative Region or Macau Special Administrative Region, unless otherwise stipulated by laws and administrative regulations or provisions of the State Council; the provisions of the Law of the People's Republic of China on the Protection of the Investment of Taiwan Compatriots and the Implementation Rules for the Law of the People's Republic of China on the Protection of the Investment of Taiwan Compatriots shall be applicable to the investment made in Mainland China by investors from Taiwan; as to matters not covered by the Law on the Protection of Taiwan Compatriots and its implementation rules thereof, the Foreign Investment Law and the Implementation Regulation shall apply mutatis mutandis."
C.Removal of relevant provisions on round-trip investment
Article 35 of the Draft for Comments has relevant provisions on Chinese round-trip investment, i.e. "upon examination by the relevant competent department of the State Council and approval by the State Council, any wholly-owned enterprise established outside China by a Chinese natural person, legal person or any other organization that invests in China may be exempted from the relevant restrictions of special administrative measures for market access stipulated in the negative list for foreign investment market access. The term "legal person or any other organization" as mentioned in the preceding stipulation does not include foreign-invested enterprises. Since there are some controversies regarding the "wholly-owned enterprise" and "approval by the State Council" in the aforementioned clauses, the Implementation Regulation eventually deleted such provision on round-trip investments.
D.Removal of relevant provisions on extending another 6-month interim period
Article 42 of the Draft for Comments has relevant provisions on extending the interim period for another 6 months, requiring that all existing foreign-invested enterprises shall go through change formalities pursuant to the laws within six months after 1 January 2025 at the latest. However, the Implementation Regulation finally strictly complied with the provisions of the Foreign Investment Law on the five-year interim period. To be specific, "if any existing foreign-invested enterprises have not completed changes on organization forms and organization structures up to January 1, 2025, the competent enterprise registration authorities shall not process any other registration matters for such enterprises and shall disclose the relevant information in the enterprise information disclosure system."2
E.Changing the Wording of "Overseas Chinese Persons"
Article 44 of the Draft for Comments3 has the concept of "Overseas Chinese Persons", which stipulates that "Investments made in China by Overseas Chinese Persons shall be governed by the Foreign Investment Law and this Implementation Regulation mutatis mutandis". Article 48 of the Implementation Regulation changed the wording of "Overseas Chinese Persons" to the expression of "Chinese citizens residing in a foreign country", which makes the application scope more specific. However, it is necessary to further clarify the criteria how to decide "residing in a foreign country".
F.Imposing Legal Liabilities of the Government and Their Staffs
Article 39 of the Foreign Investment Law only stipulates the liability of Chinese government staffs for their illegal behaviors in the promotion, protection and management of foreign investments. Compared with the Draft for Comments, the Implementation Regulation has added a separate chapter (Chapter 5) consisting of three articles on the legal liabilities of the government and their staffs for their violations of the laws. In addition, the Implementation Regulation also stresses equal treatment between domestic and foreign investors on intellectual property rights protection.
2. Features and Highlights
The Implementation Regulation continuously intensifies the opening-up policy of China to the world, guarantees national treatment to foreign investors, and strengthens the protection of foreign investments.
A.Strengthening equal treatment to foreign investors
The Implementation Regulation has repeatedly emphasized that foreign-invested enterprises shall be treated equally as domestic enterprises in terms of policy application, technical standards, government procurement, etc. and shall not be differentiated or discriminated.
1. Transparency and Equal Application of Policies and Laws
The Implementation Regulation requires strengthening the transparency of related policies of foreign investments and ensuring that the policies should meet the requirements for equal treatment between domestic and foreign investors. Regulatory documents involving foreign investments formulated by Chinese governments at all levels and the relevant departments thereof shall be subject to legality review in accordance with the provisions of the State Council.4 Regulatory documents formulated by the governments and relevant departments to support the development of enterprises shall be promptly promulgated through government gazettes, government websites, etc.5, foreign-invested enterprises and domestic enterprises shall be treated equally according to the laws in the process of any government review or approval, and any regulatory documents which are not publicized shall not be taken as the grounds for administration purposes related to foreign investments6.
2. Equal Application of Technical Standards
Foreign-invested enterprises and domestic enterprises shall equally participate in the formulation and revision of national standards, industry standards, local standards, and group standards7, and the governments shall not apply the technical requirements which are stricter than mandatory standards to foreign-invested enterprises8.
3. Equal Participation in Government Procurement
Foreign-invested enterprises can participate in government procurement activities equally, and the government and relevant departments shall not obstruct or restrict, by any means, the free access of foreign-invested enterprises to government procurement markets in their respective regions or industries. Government procurement authorities, purchasers and procurement agencies shall not apply any differentiated treatment or discriminate against foreign-invested enterprises and not discriminate between products produced by foreign-invested enterprises or services provided by such enterprises in China and Chinese domestic enterprises.9
B.Strengthening the Protection of Foreign Investments
1. No Restrictions on Inward or Outward Money Remittance
Foreign investors may, according to the laws, freely remit into or out of China, in RMB or any other foreign currency, their capital contributions, profits, capital gains, income from asset disposal, intellectual property royalties, lawful compensation, indemnity or liquidation income and so on within the territory of China. No organization or individual may illegally impose restrictions on the currency type, amount, frequency of inward or outward money remittance, etc.10
2.Local governments shall keep their policy commitments
Article 25 of the Foreign Investment Law requires local people's governments at all levels and their departments concerned shall keep policy commitments lawfully to foreign investors and foreign-funded enterprises. The term "policy commitments" referred to in Article 27 of the Implementation Regulation shall mean any written commitments made by Chinese local governments at all levels and the relevant departments, within their statutory authorities, to foreign investors and foreign-invested enterprises regarding any supporting policies, preferential measures and facilitation conditions, etc. The constitutive elements of policy commitments include: (1) Chinese governments shall make policy commitments within their statutory authorities; (2) in writing; and (3) the contents shall be in compliance with the laws and regulations and the relevant policies of the State. Local governments at all levels and their related departments shall not violate or breach any contract on the grounds of adjustments to administrative divisions, re-election of government officials, adjustments to the governmental organizations and functions or replacement of the relevant person-in-charge, etc. Otherwise, the losses suffered by foreign investors and foreign-invested enterprises shall be given fair and reasonable compensation timely in accordance with laws.11
3. Strengthening Intellectual Property Protection for Foreign Investment
China strengthens the protection of intellectual property rights of foreign investors and foreign-invested enterprises equally pursuant to the laws. Administrative authorities and their personnel shall not force, directly or in a disguised manner, foreign investors or foreign-invested enterprises to transfer technologies by making administrative licensing and implementation of supervision and inspection, administrative penalty, administrative coercion and other acts in performance of their administrative duties.12 In addition, it is significant to adopt effective measures to protect the trade secrets of foreign investors and foreign-invested enterprises which have come into their knowledge in the course of performance of their duties.13
3. The Remaining Unsolved Legal Issues
A.The security review system for foreign investment needs to be further provided in details
Article 35 of the Foreign Investment Law stipulates that the state should establish a security review system for foreign investments but lacks specific provisions on the targets, review standards, review procedures and time limits. Article 40 of the Implementation Regulation solely mentioned security review system for foreign investments. However, it has not yet been stipulated in details and needs to be further provided in the future.
B. The legal nature of the VIE structure has not been clearly defined
The foreign investments under Article 2 of the Foreign Investment Law includes the investment activity indirectly carried out by foreign investors within the territory of China, but it does not specify whether the VIE structure is covered or not14. The Implementation Regulation also does not explicitly mention the VIE structure and deleted the relevant provisions in the Draft for Comments regarding the restrictions on the negative list exemption for Chinese round-trip investments. Since the legitimacy of the VIE structure concerns the fate of many red-chip listed companies, its legal nature and treatment have attracted wide market attention. Therefore, relevant rules still need to be further specified.
To sum up, the Implementation Regulation, as a supplementary regulation of the Foreign Investment Law, highlights the main tone of promoting and protecting foreign investments in China, and improves a transparent and equal market environment to promote fair competition for foreign-invested enterprises. All existing foreign-invested enterprises should adjust their organization forms, governance structures and operation principles in accordance with the requirements of the Foreign Investment Law and the Implementation Regulation, and seize good opportunities in the process of further opening-up policies of China to have a win-win result.
1 "Premier Li Keqiang answered questions after delivering a special address at the opening ceremony of the 2019 Summer Davos Forum （the full text of a dialogue with representatives of international business, finance, think tanks and media circles）", 20190706, source: Chinese government websites, http://www.gov.cn/guowuyuan/2019-07/06/content_5406845.htm, last viewed>
2 Article 44 of the Implementing Regulation.
3 Article 44 of the Implementing Regulation for the Foreign Investment Law of the People's Republic of China (Draft for Comments).
4 Article 26 of the Implementing Regulation.
5 Article 6 of the Implementing Regulation.
6 Article 7 of the Implementing Regulation.
7 Article 13 of the Implementing Regulation.
8 Article 14 of the Implementing Regulation.
9 Article 15 of the Implementing Regulation.
10 Article 22 of the Implementing Regulation.
11 Article 28 of the Implementing Regulation.
12 Article 24 of the Implementing Regulation.
13 Article 25 of the Implementing Regulation.
14 VIE structure, also known as variable interest entity or control by agreements, is often used in business areas where foreign investment is restricted or prohibited in sectors of value-added telecommunications, games, media, education, and financial technology.
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